Stock Review: M1

Earlier on when M1's price was hovering around $2, I briefly calculated a price tag of $1.75 before I will do a more detailed review of M1's financial report. I just assumed no dividend at year end, hence whole year dividend of 11 cents, -20% discount to factor in -20% YoY decline, divide by 5% yield and arrived at 11 x 0.8 / 0.05 = $1.76.

On 11 Aug 17, the lowest price was $1.705. Prices have been hovering around $1.78, but I think it's time I write a review. High tide floats all boats and the market is at a high tide now so I am ignoring market prices.

In M1's 3Q2017 report, the concluding sentence was "Based on current outlook and barring unforeseen circumstances, we expect a decline in net profit after tax for the year 2017."

"Net profit after tax declined 4.8% year-on-year for third quarter and 13.9% year-on-year for 9 months ended 30 September, 2017. This is in line with our previous outlook statement." -- From here, I think it's safe to assume that it will decline 20% YoY.

9M2017 EPS  = 10.9 cents. assuming straight line decline, annual EPS should be 14.5 cents.

Assuming a payout ratio of 90%, which is the lower end of M1's historical payout ratio, dividend for 2017 = 13 cents.

Assuming 2 more years of consecutive 20% YoY decline,

2018 EPS 14.5 x 0.8 = 11.6 cents

2019 EPS 11.6 x 0.8 = 9.28 cents

Apply payout ratio of 90%, 9.28 x 0.9 = 8.352 cent

5% yield = 8.352 / 0.05 = $1.67

6% yield = 8.352 / 0.06 = $1.39

This is the extent of the margin of safety you can get at lower prices.

Two things were neatly hidden in plain sight which a casual reader will probably miss out.

1. Debt appeared to be downplayed. "Gearing ratio" is a technical term which casual readers will miss. It is calculated by dividing Total Debt by Total Equity. Total Debt is how much the company has borrowed. Total Equity is how much capital and retained earning over the years. When retained earnings is high, it shows that the company has been successful in accumulating wealth. If the company always pays out 100% of earnings as dividends, then $0 goes into Equity. Imagine you have $10,000 in your savings and I lend you $60,000 as unsecured lending (not backed by anything like your branded handbag or gold ring), your gearing ratio is 6 times, and I run a very high risk of not getting my money back because you only have $10,000. 

Interest coverage ratio shows the ability of the company to pay interest expenses with earnings - the higher the better - they were in a better position in 2016 because earnings were higher. Imagine you have a fixed interest expense, and your salary is decreased 20% YoY, then you will find it harder to repay. Usually you need to pay the interest to keep the loan active so that your bank will not force you to sell your assets to raise money.

9M2017 Page 20 of 22 Gearing and Interest Cover

However, this will probably not concern you if you are a shareholder of Starhub because Starhub's gearing ratio is much higher at 6 times. Just for comparison, I had calculated Singtel's gearing ratio too. Just as an illustration, REITs have a gearing ratio of around 30% to max 45%, so you read it in REITs presentation slides as 0.3x or 0.45x.

Accurate as at date of data extraction on 8/11/17

2. There is also a CAPEX item - spectrum rights - that will likely be recorded in Q4 and beyond. The report did not mention how they will fund the purchase, be it cash or loan. When reconciled with the cash flow statement, nothing has been paid yet. 

9M2017 Page 19 of 22 - CAPEX and Commitments

9M2017 Page 3 of 22 Cash Flow Statement - spectrum rights not paid yet

Taking its debt and committed CAPEX into consideration, I am sitting out and will probably review again when the price hits $1.39.